Tax Reform Changes on the Horizon
Deciding to be a practice owner is a big enough decision, but you may be lucky enough to have to make another decision: whether to buy or lease the commercial space for your dental practice. Like many things in life and business, the answer is: it depends. There are pros and cons to both options, and we are going to analyze some of those as you get ready to make your decision.
Advantages and Disadvantages of Owning
Most successful advisors will tell you that owning real estate should be a major part of your retirement portfolio, which is something that we also agree with, as we have seen thousands of dentists retire comfortably with real estate holdings.
If you’re lucky, you’ll be able to purchase commercial real estate with tenants who have leases, providing you with a regular income stream. Although the old adage that real estate never goes down is certainly not true, over the long haul there is very strong appreciation in value in most geographic areas.
Additionally, you will be paying down the debt while you use the property, so you can build significant equity. Not only is the equity great, it can also provide you with a hedge against inflation as rents normally increase at least 2-5% every year.
Your CPA will tell you that significant tax benefits will be available, such as being able to deduct mortgage interest and depreciation, which can further reduce your taxes and increase your income.
As with most things, there are drawbacks. You will likely need a 10-20% down payment for the loan, which may make you cash poor. You will also be responsible for paying taxes on the entire building, which can be over 1% of the building’s value, in addition to any capital and/or maintenance costs that may need to be addressed for the comfort of your tenants.
There is a significant time investment required when you own and manage your own building. There are a lot of things to do when you purchase a practice or start one from scratch, such as marketing, billing, insurance and human resources. When you become a commercial property owner or landlord, your obligations increase both in terms of time and money. Suddenly you are in charge of literally every inch of your building, as landlords are generally responsible for all repairs and maintenance issues, including keeping the carpets clean or the common areas tidy. Although many commercial property management issues can be complex, you have the option of hiring a property manager or a property management company to handle any disputes that may arise.
Finally, there’s a risk associated with owning commercial real estate. For example, if tenants have customers or if you have a lot of patients that come and go, they may get injured or things may happen while they are on your property. Therefore, it is vital you have all the appropriate insurance policies.
Despite the disadvantages, the general belief is that it’s a wise investment to own your own property, and even more so if your dental practice is located within that property. Although it may take a few years of hard work and financial investment, it will pay off in the long-term – especially if you end up selling the practice but keeping the building, as you will now have a stable long-term tenant.
Advantages and Disadvantages of Leasing
There are some advisors who advise against owning real estate, especially in certain markets where the advantages detailed above do not come to fruition as easily or if the real estate market is so hot that finding a good property is very difficult.
You should not shy away from leasing your space, as the advantages of starting your practice quickly are just as important as owning your space. For example, the move-in costs are generally much less as the landlord will likely assist you with some tenant improvement money. Additionally, depending on the kind of lease you get and how well you negotiate, you may be able to lower your monthly costs to be in the space. If you plan on expanding the practice or spending a lot on technology, it might be best to save your cash to invest in the practice as opposed to buying a commercial property.
Another perk of leasing is that relocating is possible because you are only committed until the end of your lease. Once it ends, you are free to move your practice as you wish or extend your lease. If you buy your commercial space, it becomes a little more complicated because relocating a dental practice when you own the building is not only expensive, but can result in lost rental revenue. Additionally, if you move too far away the results will be extra impactful because not only are you losing rental income, but you also might be losing patient revenue because you are moving away from your existing patient base.
If you are confident that the location you are looking at is where you want to be now and well into the future, then buying may make sense. If you think you want more flexibility to relocate, you should consider leasing.
Some questions to ask yourself in this regard, include:
• Do you plan to expand? You may need a larger space for more operatories or treatment rooms.
• Is the surrounding area good for business? Do some research into the patient-base you will be working with. How is it trending? Is it a retirement area? Are families moving in? These can be good signs that your business forecasts will be stable for some time to come. However, keep in mind things can always change. For more of a descriptive study of your needs within your market area and your patient-base, we recommend consulting with EOS Healthcare Marketing as a resource to the business side of your dental practice.
• Will the community change? If you buy a building, it is what it is, and what it is may become outdated in 10 or 20 years. Then you may need to invest in it again to make it more modern or cater to what your clients are looking for when they step into your office. If you feel comfortable with that, and can still make it a profitable investment, consider buying. If you would rather be able to step away and into another building with less hassle, consider a lease.
When it comes to deciding to buy or lease your dental office, there are many factors to consider, such as where your business is and where you envision it going. Ask yourself how invested you can be in the business, whether you plan to sell down the road or if you may need to relocate. These three key questions will establish a good foundation to help guide you towards a decision before speaking with your dental CPA and dental lawyer.
Ali Oromchian is a dental attorney at the Dental & Medical Counsel, PC law firm and is renowned for his expertise in legal matters pertaining to dentists. Mr. Oromchian has served as a key opinion leader and legal authority in the dental industry with dental CPAs, consultants, banks, insurance brokers and dental supplies and equipment companies. He is also the author of The Strategic Dentist: An Entrepreneur’s Guide to Owning a Dental Practice.